Mongolia Clears Hurdles Needed for $5.5 Billion IMF-Led Bailout

Mongolia has fulfilled prerequisites from the International Monetary Fund to receive a $5.5-billion bailout and is expected to receive an initial tranche of cash at the end of this month.

“All the prior conditions have been met” for Mongolia to receive an IMF-supported package, Neil Saker, resident representative for the fund said Wednesday in the capital, Ulaanbaatar. “It is their program and along the lines of their recovery plan. Strong country ownership will increase the chances of success.’’

A downturn in commodity prices and disputes with investors soured Mongolia’s once world-beating economy, sending economic growth to just 1 percent last year from 17 percent in 2011. The World Bank is forecasting a contraction of 0.2 percent this year.

The IMF will lend about $425 million, payable over 10 years, Saker said. Other donors including the World Bank, Asian Development Bank, Japan and Korea will lend around $3 billion at highly concessional rates, he added. The announcement of the IMF deal in February allowed the government to extend a 15 billion yuan ($2.2 billion) currency swap with China by three years.

The three conditions met by Mongolia include the passage of a supplementary 2017 budget, confirmation from the central bank that it will refrain from quasi-fiscal activities and an asset-quality review of the country’s banks, according to Saker. The review must be completed by November, he said.

Progress Review

IMF money will be used for balance of payment support, said Saker, adding that donor money will support the budget deficit, which last year reached 17 percent of gross domestic product. The ratio is expected to fall to around 11 percent this year and 4 percent by 2020, Saker said.

“Loans issued at a low interest rate will improve the debt burden,’’ said Saker. “The loans will improve confidence in the market. Policies to strengthen the banks will lead to lower interest rates, job creation and more inclusive growth. Reduced banking risk will also stabilize the currency.’’

Saker said confidence in Mongolia is picking up, as shown by the last month’s $600-million 8.75-percent seven-year “Khuraldai bond” sale, which was six times oversubscribed.

The IMF will review Mongolia’s progress every three months over the program, distributing money after each successful review, said Saker. Windfalls due to higher commodity prices should go toward building reserves and paying off debts, he said, adding that Mongolia’s total government debt is now close to 90 percent of GDP.

Some of the fiscal amendments passed by parliament turned controversial in Ulaanbaatar, where the Chamber of Commerce threatened to boycott tax payments. These include a progressive income tax that has the highest earners paying 25 percent and a new tax on the interest accumulated in savings accounts.

‘Bitter’ Medicine

Parliament also passed increased taxes on tobacco products, passenger vehicles and alcohol. Social insurance by both taxpayers and companies are also set to increase.

“The IMF medicine is bitter for the population, but in order to save the economy you have to do things that are not popular,” Khashchuluun Chuluundorj, an economist at the National University of Mongolia, said by phone. “This is a break from the past when the government was only doing populist things, like distributing money or stocks and lowering taxes.”

Swept into power with a clear mandate following elections in June, the Mongolian People’s Party has slashed government spending, including 30 percent to 60 percent salary cuts for the chief executives of state companies.

The market has reacted favorably to the changes, with Mongolia’s currency rising 2.5 percent against the dollar since March 1. The yields on Mongolia’s international bonds have declined to 2012 coupon levels.

The IMF projects that by 2019 Mongolia’s GDP growth will reach 8 percent. Foreign exchange reserves are expected to reach $3.8 billion by the end of the program, near 2012 levels, according to the fund.

Coal Prices

Even without the bailout, Mongolia’s fortunes are turning on the back of higher coal prices. Mongolia exported 8.1 million tons of coal in the first three months of 2017, worth $541.3 million, a year-on-year increase of 446 percent. The total value of Mongolia’s exports rose to $1.3 billion in the first quarter, an increase of 36 percent from a year earlier.

The increase in coal exports allowed Mongolia’s largest state-owned coal miner Erdenes Tavan Tolgoi JSC to complete a repayment of a $350 million loan it took in 2011 from the Aluminum Corp. of China Ltd.